Intact’s financials intact

Once may have been an aberration, but for the second time in less than a year investors have shown their confidence in the judgment of the senior management team at Intact Financial Corp. to make acquisitions

Once may have been an aberration, but for the second time in less than a year investors have shown their confidence in the judgment of the senior management team at Intact Financial Corp. to make acquisitions.

Last May, the company announced the $2.6-billion acquisition of AXA Canada, a transaction that combined the country’s largest home, auto and business insurance company with the sixth-largest and which was expected to “generate an internal rate of return of 20% and provide annual accretion to operating earnings per share of 15% in the mid-term.”

To help finance the acquisition, Intact inked a bought deal whereby it would issue 17.5 million subscription receipts at $47.80 per receipt. When the equity financing closed and when the underwriters exercised the over-allotment option of 2.625 million receipts, Intact had raised gross proceeds of $962-million.[np-related]

The market didn’t take long to indicate its view on the transaction that was announced after the markets closed on May 31. At $47.80 apiece the receipts were sold at a rather healthy 5.5% discount to the stock’s trading price ($49.77), the day the deal was announced. But the next day investors made up that discount, and for good measure added more gains. The stock closed at $54.62. Since then the stock has been on a slow but steady rise and closed Tuesday at $63.38.

Wednesday morning Intact announced a new transaction, a $530-million acquisition of JEVCO Insurance Co. JEVCO is a unit of Westaim Corp.

Once again Intact believes it can generate an internal rate of return of more than 20% from the acquisition in an area of the insurance market deemed complementary to its main business. And once again, Intact financed part of the acquisition with equity, the sale of 3.6 million subscription receipts at $62.75 a share. (The underwriters, CIBC World Markets and TD Securities, have an option to sell 180,000 additional receipts.)

The receipts are being sold at a slight discount: The shares closed at $63.38 on Tuesday, and investors took the stock higher the next day. By the close of business Wednesday, Intact traded at $63.90. Intraday it traded at a 52-week high of $64.56.

What gives?

Tuesday night, Paul Holden, an analyst at CIBC World Markets, issued a note on Intact’s just released first-quarter financial statements. (Given that his firm advised Intact Holden can’t provide comment.)

But in a note written late Tuesday, Holden termed the results “another excellent quarter” with earnings above both his estimate and the Street’s consensus. He also referred to an improvement in claims ratio, a decrease in personal property claims (a decrease attributable to “specific actions taken by the company to improve profitability and mild weather”), an increase in direct premiums and synergies.

In other words, management gets praise not only because it selects good targets, but because it can successfully integrate the acquired businesses. On the AXA deal, Intact aimed to achieve $100-million in synergies by the second half of 2013. At the end of its most recent quarter, Holden calculated that the run rate for AXA synergies is $36-million compared with $18-million at the end of 2011. For Intact, acquisitions are probably easier than for other insurers given that its stock trades at more than twice book value.

After Intact’s financials were released, analysts at RBC raised their target (to $72 from $68) while Canaccord Genuity hiked its target to $71 from $69.